2. Opportunity cost and actual
cost
Direct and indirect cost
Explicit and implicit cost
Historical and replacement cost
Fixed cost and variable cost
Real and prime cost
Total,average,and marginal cost
Types of costs
3. Opportunity cost : Cost incurred for
loosing next best alternative
Actual cost : An actual amount paid or incurred, as
opposed to estimated cost or standard cost.
Explicit and implicit cost
Explicit cost refers to the money expended to buy
or hire resources from outside the organization for
the process of production
Opportunity cost and actual cost
4. Implicit cost refers to the cost of use of the
self owned resources of organization that are
used in production.
Direct and Indirect cost
Direct cost is a cost.
Direct Cost: Direct costs are those cost that have directly
accountable to specific cost object such as a process or
product
Ex:wages paid ,salary paid labor, material…etc
5. Indirect cost are those costs which are not directly
accountable to specific cost object or not directly related
to production
Ex: insurance, mentainence ,telecom, ….etc
Historical and replacement cost
Historical cost refers to the original (actual) cost
incurred at the time the asset was acquired
The replacement cost is the price that an entity
would pay to replace an existing assets at current
market price that may not be market valueof that
asset.
Indirect cost:
6. Fixed and variable cost
Fixed cost is the cost that remains unchanged
irrespective of the output level or sales revenue such
as intrest,rent,salaries etc
Variable cost are thoese costs that vary depending on a
company’s production volume; they raise as
production increases and fall as production decreases
7. Real cost and Prime cost
Real cost of a production refers to the physical
quantities of various factors used in producing
commodity
Ex: Real cost of a table composes of a carpenter’s labor
to cubic feet of a wood ,a dozen of nails, half a bottle
of varnish…..etc
“ Real cost thus signifies the aggregate of real
productive resources absorbed in the production”
8. Prime cost
The direct cost of commodity in terms of the
materials and labor
excluding fixed cost
involved in its production
By calculating prime cost the firm can decide how
much should be their selling price to earn profit
9. Total cost : it is the cost refers to the total expenses
incurred in reaching a particular level of output
TC = TVC + TFC
Total Cost
10. Marginal cost
The marginal cost is also per unit cost of
production. It is the addition made to the
total cost by producing one more unit of
output
MCn = TCn – TCn-1
i.e the marginal cost of the unit of output is the total
cost of producing n units minus the total cost of
producing n-1 (i.e …one less in the total) units of
output
11. Average cost
Average cost is the total cost divided by total units of
output Thus,
TC
AC =
Q
Where Q is the quantity produced
12. Average fixed cost (AFC)
Average fixed cost is the total fixed cost divided by
total units of output
TFC
AFC =
Q
Where Q is the number of units produced
13. Average Variable cost
Average variable cost is total variable cost divided by
quantity produced
TVC
AVC =
Q
Where Q is the quantity produced
14. Managerial uses of cost
analysis
To find most profitable rate of operation of the firm
To determine in advance the cost of business
operations
To fix the price of the product
To decide what sales channel to use
To have clarity about the various cost concepts
